Recovering your retirement

Posted on November 30, 2011November 30, 2011 by Danielle

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Ever heard the saying “call a dog a good name”? The theory, I suppose, is that then the dog will live up to it. It works when thinking about retirement, too.

Many of us past 50 regret that we didn’t save enough, or bought real estate at the wrong time or made any one of a variety of (in retrospect) bad life decisions that cost us a ton of money. But, as every talk-show psychologist will re-affirm, you can’t change the past. Also, you don’t have total control over the future. I’ve been lucky enough to have some really wise older people in my life, and I try to listen up. Here’s what I’ve learned:

Focus on what IS. Coulda’, shoulda’, mighta’ been is totally unproductive and depressing. Imagination is always better than reality. How many people have you heard say, I have this terrific idea for a novel, which never gets written. It’s because making something real requires discarding other possibilities and getting down to the work of it all, which isn’t so fun. The happiest elderly people I know are people who are happy with what they have, and usually, possessions aren’t the first thing on their list.
Stuff isn’t important at all. If you need any confirmation of that, try cleaning out the possessions of a person who has died. You can hardly give away the furniture, the electronics, the clothes.
It’s never too late to save. Maybe you can’t save tons of money for retirement, but anything helps. $5,000 stashed away can pay for several trips to see the grandchildren, or a decent amount of gardening assistance or…well, in retirement you’ll think of something. Have you EVER heard anyone say I’m sorry I had that emergency fund? An article in a recent AARP newsletter mentioned a guy who even saves during retirement—he budgets so he can squirrel away a little in an emergency/travel/one-time purchase account. It’s a good idea to keep up the habit.
Start lowering your expenses NOW to what you can reasonably expect to spend in retirement. Let me give you an example: you’re making $500,000 a year, you have $1,000,000 saved and you’re 58 years old. Sure, you’re never going to retire–seriously? You’re still going to toddle into the law office at 85 after a knee replacement and a mild heart attack? So, unless your name is Warren Buffett, humor me. You need to retire sometime, and it’s true that the longer you put it off, the more chance you have of not outliving your money.

Judging from your level of savings (in the example above), you’ve been spending quite a chunk of your income, but your portfolio is only going to generate about $40,000 per year as a safe withdrawal. Add, say $3,000 a month in Social Security (we’ll assume you’re married) and you’ll have a total income of $76,000 a year—quite a change from living large on $500K. You can either hope for a heart attack or take some serious, helpful action. Cut your expenses now. Start putting away 20% of your income (in this case $100,000) for the next 12 years and you’ll achieve several things. You’ll find a way to live on less while it’s still a choice, and you’ll rack up another $1,600,000 (assuming 6% interest) to improve your retirement income. Now we’re at $104,000 a year in income beyond Social Security. Find a way to make it $200,000 and you’ll have about $3.4 million which added to the $1 million of your savings gives you $175K a year in withdrawal income. Reduce now and you’ll have a far easier time later. Not making $500,000? Add or reduce zeros as needed.

It’s about as difficult for most people to lower their lifestyle as it is to lose weight. More people lose weight when they’re facing serious health issues, so we know it can be done. If there’s a yawning gap between your savings and your current spending levels, you’re facing a serious issue! Rule of thumb—you need at least 12 times your annual income to retire anywhere near your current lifestyle, and that’s a pretty tight amount that assumes you’re been saving about 20% (not spending it) and getting Social Security. For example, a person earning $60,000/year would have $720,000 in savings for a retirement withdrawal of $28,800 plus Social Security of, say, $18,000=$50,400. The less you make, the more likely Social Security can replace a significant portion. Once you get used to living on or making more than $100K, the gap must be filled bywithdrawal from investments. Without significant savings, the richer you live now, the more you’ll feel the pinch at retirement.

So, maybe you need to make the hard decisions—sell the house and invest any equity, lower your payments, reduce the number of cars, downsize the restaurant meals, respect you kids enough to let them stand on their own two feet.

You can call it miserable or you can call it liberating—simplifying your life while you are still in charge of the choices is freedom, in my book. Problems don’t go away just because you don’t face them. Facing them allows you the power to choose the changes and re-shape your life into something that can work for you.

How to be wealthy

Posted on November 16, 2011November 16, 2011 by Danielle

If you make $700,000 a year, you’re wealthy. If you make $30,000, you’re not. Right? Not in my book. What you have is a high income. But wealth is not about what comes in, it’s about what goes out. So let me propose a few ideas on what makes for wealth, and some ideas for getting there.

Wealth is measured by how much you hold on to. If your checking account resembles a sieve, you’re not wealthy. If money goes out as fast as it comes in, or (even worse) in larger amounts than what is coming in, you’re not wealthy no matter how much the inflow is. My guess is, you have a lot of junk.

If you have a lot of STUFF, you’re nowhere near a wealthy as you think. Don’t believe me? Go to a couple of resale shops or garage sales and see what your stuff is actually worth. I never count household goods as meaningful in an asset statement. The only time in financial planning land that your prized possessions are worth considering is when we’re looking at insurance.

If you wouldn’t be willing to sell it, and don’t know how to do it, it’s not an asset. One of my favorite shows is Antiques Roadshow, but you just know most of this stuff is never going to be sold, so really, it has no market value except to heirs. If you have a wine collection, come on, you’re going to drink it. Doll collection? You’re going to be dusting it for your lifetime. And paying insurance on it. Yes, these things can be immensely satisfying to possess and if you can afford it (i.e., you’re already wealthy), well, enjoy. I understand that people do upgrade collections and sell a case of wine now and then, but for the most part these are luxurious hobbies that your heirs will be fighting over. The market for these investments can be very illiquid (do you know how to sell a button collection?), costly to sell (auction commissions), expensive to protect and maintain, and carry a high income tax (a whopping 28%).

On the simplest level, you’re wealthy if you have excess beyond basic needs. By this standard, virtually everyone in the U.S. is wealthy compared to the rest of the world. Even people who would be considered in dire poverty in most of the Western economies are wealthy compared to the Third World. If you get hit in the street here, an ambulance will pick you up, take you to the hospital, and you’ll get treatment. If that ever happens to you, my personal experience says that’s wealthy.

On the next level, you’re wealthy if you meet your basic needs and still have any left. Here’s where we can begin to have an impact on how wealthy we are or become. As Dickens’ character Mr. Micawber says, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” For an example, my parents were wealthier than many of the clients I see. Although my dad never made more than $28,000 in his life and my mom was primarily a homemaker, they had more than enough to live comfortably in the home they loved, eat at restaurants they enjoyed, bail out their daughter during several financial crises, and die with money remaining in their investments. Was the house 5,000 square feet? Were the restaurants the kind where the maître d’ walks backwards? Did they expect their daughter to pay them back? No, no, and no (but I did).

I’m not saying that you have to live on beans and shop only on Craigslist. But somehow, you have to live lower than the limit of your income. Numbers? At least 20% lower—and that 20% goes into 1)emergency stash 2)retirement 3)long term goals 4)investments (business startups, real estate, stock market, whatever). Without savings, you really have no way to take advantage of opportunities that come your way and no ability to ride out the waves of uncertainty and surprises that life brings. Peace of mind is real wealth.

Up to now I’m only talking about material wealth (hey, I’m a financial planner).But of course I think there are many things that make you wealthy which have much more value than money: the love and respect of your children, the ability to adapt to challenging circumstances, the ability to make yourself happy without spending money, the sense of having done something worthwhile in your life, friends that will step in when you’re down. I wish I could help with those things, too, but getting a good financial plan can really free your focus to move on to those higher levels of wealth.

Small business success: answer that phone

Posted on November 9, 2011November 9, 2011 by Danielle

Image by plenty.r. via Flickr

This is a little off the financial planning rails today, but it’s a rant about something that certainly can have long term financial effects: the art of the callback. I’m hoping someone can clue me in on a phenomenon I’m seeing lately.

I go to more networking events than my diet can really handle, and I’m a little embarrassed to say I enjoy them. Woohoo I get to get away from the giant computer screen, the blizzard of paperwork, the dog that has to go out every time the phone rings, and the cat that just recently dropped a dead mouse on my foot while I was talking to a client. I have an excuse to cut the tags off the good clothes. I talk to adults without having to pull out a calculator. There’s good martinis. I enthusiastically collect cards of people who sound like they might offer some service that would benefit my clients.

I call them. Lately, I don’t hear back from a significant portion of them. Why? Well, maybe they don’t need business—but then why are they going to networking events? They don’t like me? Generally, I haven’t talked to them long enough for them to know anything about me or much about my business. I smell weird and my mom dresses me funny? Don’t think so, and mom is long gone. They’re lazy, neglectful and disorganized? Um…

If you’re in business, you know how people hound the media to get press attention? Well, I left a message for one guy with an offer to quote him in a national magazine article I was writing. Never heard back. When I saw him again, I asked. Answer: Um, I was a little busy that day. Yeah, well what about THAT WEEK? Bet not. Another example: called a mortgage lender who was fawning over a stock broker at the meeting we both attended. Good luck on that one, as that brokerage house has its own mortgage division. I had a quick question for an extremely well qualified client, the kind that supposedly they can’t find any more. Never heard back. Guess where that biz card is?

It’s a pretty good rule that if you’re leading off with “Um…”, you’ve probably just lost some business. So, my great insight here is one I’ve been pounding into my daughter for years—a lot of success in life is just showing up. And trying to treat people as you would like to be treated. There’s a new concept, no?

If you ever call or email and don’t hear back from me in 24 hours, you’ll know I’m in the hospital, dead, or out of the country (in which case my message will say so). Really, most of us are on the internet all day long. Tear yourself away from Facebook for 2 minutes and call back!